Trust & Estates newsletter - Jan. 2011

Articles about separate shares in fiduciary income tax returns, electing to merge a qualified revocable trust with the decedent's estate, highlights of the new estate tax legislation, charts on NY fiduciary commissions and valuation methods for estate tax return assets.

Trust & Estates Taxes and Planning If a trust or estate’s beneficiaries have substantially independent shares, the DNI allocable to each beneficiary is calculated as if a separate trust or estate actually existed. By independent it is meant that the economic interest of one beneficiary does not affect and is not affected by the economic interest of another beneficiary. Separate shares is important in a situation where income is accumulated for one beneficiary but a distribution is made to another of both income and principal that is in excess of the income that would be allocated to him if there actually had been a separate trust or estate. Here are two examples. 1) Decedent’s will directs the executor to distribute IBM stock and all dividends from that stock to his son, Steven and the residue of the estate to his son, Michael. Separate shares (Continued on page 2) Section 645 Election Merging the revocable trust with the estate Trusts, as well as estates, can function to administer and settle the affairs of the decedent and disburse the assets to the beneficiaries. Under §645, the executor of the decedent’s estate and the trustee of a qualified revocable trust can elect to treat the trust as part of the estate for income tax purposes. A qualified revocable trust is one that is owned by the decedent because he or she had the power to revoke the trust under code §676. The election to file as a merged estate is made on Form 8855 which is attached to a timely filed Form 1041 for the first tax year of the estate. If the election is made the trust need not file a Form 1041; all trust income and expenses are reported on the estate’s return under the name and tax ID number of the estate. Under the separate share rules of §663(c), the merged trust and estate constitute separate shares for purposes of computing distributable net income. (Continued on page 2) Date: January 2011 Volume No.: 1 Issue No.: 4 Separate Shares Taxation Issues TM Financial Services Thomas Mohle, CPA 201-546-6718 tmohle@optonline.net Separate Shares (continued from page 1) exist for the IBM dividends and the estate residue. (The distribution of the IBM stock qualifies as a bequest, so it is not a separate share). Here the economic interest of Steven is clearly unaffected by Michael and vice versa. 2) A trust was created for the benefit of Steven, Michael & Joe, ages 21,18 & 17 respectively. Under the terms of the trust, income is required to be divided into three equal shares. Each beneficiary's share of the income is to be accumulated until he becomes 21 years of age at which time his share of the income may be either accumulated or distributed to him at the discretion of the trustee. The trustee also has discretion to invade corpus for the benefit of any beneficiary. In the current year the trust has interest income of $20,000 and expenses of $5,000 – DNI of $15,000. The trustee in his discretion distributes $12,000 to Steven. The trust qualifies for the separate share treatment under section 663(c) and the distributable net income must be divided into three parts for the purpose of determining the amount deductible by the trust under section 661 and the amount includible in Steven’s gross income under section 662. Without the separate shares rule, schedule B of the 1041 would show $15,000 of DNI and other amounts paid of $12,000. Therefore the trust would have an income distribution deduction of the lesser of the two, i.e. $12,000 and taxable income of $3,000. Steven would be required to report $12,000 of income even though the trust states that income is to be divided equally. (Continued on page 3) Page 2 §645 (continued from page 1) There are a number of advantages to making the election: • The trust can adopt a fiscal year as part of the estate. • The active participation rule related to passive losses and the $25,000 rental real estate allowance is waived. • A savings on tax preparation fees. • A deduction can be taken for funds set aside for a charity. Normally a trust can only deduct amounts actually paid out. • The merged estate/trust is entitled to a $600 personal exemption instead of either $300 or $100 for a trust depending upon whether all income is distributed. • Unlike a trust, an estate need not make estimated taxes for two years following the decedent’s death. A disadvantage of the election is that the combined income of the trust and estate can push the entity into the highest tax bracket. Of course the problem is avoided if all of the combined income is distributed to the beneficiaries. The election, once made, is irrevocable. Trusts & Estates Taxes and Planning Page 3 Separate Shares (continued from Page 2) With the separate share rule, the DNI calculation is performed for each beneficiary. Steven’s DNI here is $5,000 ($15,000 x .333). This is less than the amount actually distributed to Steven and limits the income reported by him. (The remaining $7,000 is a tax free distribution of corpus). Summary of taxation under 663(c) with separate shares compared to results which would be reported otherwise: Without With Separate Separate K-1 Shares Shares Steven $12,000 $5,000 Michael --Joe --Trust(1041) $3,000 $10,000 New York Fiduciary Commissions Compensation of Executors 5% on first $100,000 of assets received 4% on next $200,000 3% on next $700,000 2.5% on next $4,000,000 2% on amounts over $5,000,000 SCPA §2307 Compensation of Trustees Upon Settlement 1% for paying out all money constituting principal Annual Commissions $10.50 per thousand on first $400,000 of principal $4.50 per thousand on next $600,000 $3.00 per thousand on all additional principal SCPA §2309(2) Form 706 Asset Valuations Savings & checking accounts Principal balance at DOD plus accrued interest Real Estate Fair Market Value Listed bonds & stocks Average of high & low prices on DOD OTC Stocks Average bid & ask price on DOD Load Mutual Funds Bid price No-load Mutual Funds Net Asset Value Treasury Bills Face amount x 1-(Interest rate x days to maturity) /365 Annuity (lump sum) Lump sum amount Annuity (Installments) Commuted value (PV & beneficiary’s life expectancy) Survivor annuity (Joint & Survivor) Amount insurance company would charge for single life annuity Survivor annuity (Fixed duration) Annuity for term certain with commuted basis computation Community Property One half of value of property Joint tenancy with spouse One half of value of property Joint tenancy with other than spouse Entire value unless portion acquired by surviving tenant Tenants in Common Entire value x percent of ownership Life Insurance on decedent’s life Amount receivable by beneficiary Life Insurance owned by decedent Cost of buying another policy on the same insured on life of another Trusts & Estates Taxes and Planning 2010 Tax Act Highlights Estate Tax & GST Exemption: 2010, 2011 & 2012 -$5,000,000 Estate Tax Rate: 2010, 2011 & 2012 -35% GST Rate: 2010 -0%, 2011 & 2012 -35% Gift Tax Exemption: 2010 -$1,000,000 2011 & 2012 -$5,000,000 Gift Tax Rate: 2010, 2011 & 2012 -35% Important Phone Numbers The $5,000,000, 35% rule will apply for the estate tax in 2010 unless an election is made to use the modified carryover basis rules. The Act also provides portability for the estate tax exemption – any unused exemption of the decedent may be used by the surviving spouse. IRS General Information 800-829-1040 EINs 800-829-4933 Form 706 & 709 866-699-4083 Page 4 NJ General Information 609-826-4400 Estate & Inheritance 609-292-5033 NY General Information 518-457-5181 Estate Tax 518-457-5387 CT General Information 860-297-5962 PA General Information 717-787-8201 TM Financial Services Thomas Mohle, CPA Certified Specialist in Estate Planning 86 Fourth Street Park Ridge, NJ 07656 (201) 546-6718 tmohle@optonline.net www.tmfinancial.homestead.com Estate & Gift Tax returns Fiduciary Income Tax returns Fiduciary accountings And more…………. While we have made every effort to ensure that the information in this newsletter is accurate, we make no representations or guarantees as to the accuracy or completeness of the content found in it. Given the changing nature of laws, rules and regulations, there may be some omissions or inaccuracies in the information provided. In no event will we liable for any decisions made or actions taken, including any loss or damage sustained from those decisions or actions, as a result of reliance on the information provided herein. This newsletter does not attempt to provide estate planning or tax advice. For such services, please seek professional help and any actions based on the information in this newsletter should only be undertaken after consulting your professional advisor.. Additionally, any federal tax information contained in this newsletter is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

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